Why is productivity such a challenge in the UK?

It takes bravery to admit you’ve got something wrong, so let’s start by applauding the Office for Budget Responsibility.

At the heart of its report today was a whopping great mea cupla.

It came clean about a long-term failure to predict how productivity would change. That’s important because productivity is seen by many analysts as one of the most significant insights into the state of an economy.
What is it? Well, productivity measures how much is created by each person, each hour. Obviously we all vary, so it’s all combined and an average figure is put together to measure just how productive we are as a country.
What you would want is for that figure to be going up continually, as employees become better trained and companies invest in more advanced techniques. But since the financial crisis, productivity has been going up at a slow, uncertain plod, rather than the steady jog that the OBR has constantly predicted. A few days ago, it emerged that UK productivity had actually worsened in the 12 months since the Brexit referendum.
What’s more, Britain’s productivity is notably worse than comparable countries, such as France and Germany. The UK’s average output is 15% worse than in other major economies, and the gap is widening.
It matters because low productivity holds back economic growth and that, in turn, limits the amount of money that the Government has to spend.
When the Chancellor sits down to write his Budget, he bases his spending plans on forecasts of how quickly the UK economy will grow. For the past few years, the OBR has been – wrongly – predicting healthy growth in productivity. Now, the forecast will be a lot more dreary.
The OBR says it will have to “significantly downgrade” its forecasts after concluding that there was a “recurring theme” of being too optimistic and so, tucked away on page 72 of its 110-page report, is this: “It seems clear that we will need to revise down trend productivity growth again… it is highly likely that the downward revision to productivity growth will dominate in terms of its effect on cumulative GDP growth over the forecast horizon and the associated consequences for the budget deficit.”
In other words – we’re now going to forecast meagre productivity growth, which means lower economic growth, which means less money for the Chancellor to play with.

:: Ian King – Productivity decline is headache for Hammond
So that leaves two big questions.
One is the effect on Philip Hammond’s spending plans, with some predicting that he will have many billions of pounds less to spend.
But the other question is exactly why productivity is such a challenge in this country.
One of the main theories was that it was a hangover from the financial crisis, when companies kept on staff rather than investing in new machinery. The OBR says that’s no longer a viable excuse, and nor is a problem with the banking system.
It says there is a problem with businesses simply not investing enough, but doesn’t explain why this has happened. It raises the spectre that ultra-low interest rates have helped sustain “zombie companies” that just about survive, but contribute little to the economy. It even suggests that advanced economies may be entering a period of “permanently subdued productivity growth”.
This is a report full of questions, but most attention will go to an answer – the conclusion that the OBR has been too optimistic for years, and must now be more sanguine and realistic.
It is not an answer that the Chancellor will welcome.